What employers should take into account upon undertaking a retrenchment exercise in Malaysia

published on 30 August 2021 | reading time approx. 3 minutes

Geetha Salva (Advocate & Solicitor, Salva & Associates in Association with Rödl & Partner) & Christian Swoboda (Rödl & Partner)

The Ministry of Human Resources has recognized the Code of Conduct for Industrial Harmony (‘Code’). The Code is a non-binding set of guidelines. Despite being non-binding, the Malaysian courts have given importance to the application of the Code. The Code does provide provisions for retrenchment.

It is important to emphasize that although the Code is not binding, the Industrial Court Act 1967 provides that upon making an award, a court “…may take into consideration any agreement or code relating to employment practices…”.

In Ng Chang Seng v Technip Geoproduction (M) Sdn Bhd & Anor (2021) 1 MLJ 447, the Court of Appeal recently laid out a few principles that employers should take into account upon undertaking a retrenchment exercise.

Brief facts

Ng Chang See (‘the Employee’) had been working for Technip Geoproduction (M) Sdn Bhd (‘the Company’) for around 13 years, and was retrenched by the Company due to redundancy as part of global downsizing. The Employee alleged that he was unfairly dismissed by the Company on the grounds that:

The principle of last-in-first-out (‘LIFO’) was not followed;
Foreign employees of the Company were not retrenched when they should be before him; and
The retrenchment exercise was mala fide i.e. not genuine as the real reason for the termination was the Company not being satisfied with his performance.

The Employee brought a claim to the Industrial Court and received an award for compensation and cost on the grounds that the retrenchment was not genuine and the retrenchment was a cloak to conceal the Company’s dissatisfaction with the Employee’s performance and attitude.

The Company appealed the Industrial Court’s award to the High Court, whereby the High Court found that the retrenchment exercise was indeed genuine. The Employee then appealed the High Court’s award to the Court of Appeal.

Now – The court of appeal’s verdict

The Court of Appeal found in favour of the Employee and laid down a few principles with regard to retrenchment of employees.

The employer must be able to prove that the employee was redundant and could not be reassigned to other projects/work. The Court of Appeal found the Company failed to prove this as the Company continued to re-engage former employees who had been terminated to fill in the Employee’s job function. The Company also continued to employ foreigners. This does not suggest downsizing.
Retrenchment cannot be used as a short-cut to dismiss employees for other causes. If the Company wanted to dismiss the Employee for other reasons, the Company should go through the termination procedures and not retrenchment.
In deciding whether there is redundancy, the court will look at the employees that were retained and also at the number of employees retrenched. The test should be whether the Employee ought to have been selected for retrenchment compared to other employees in the same department who remained in employment. The Court found that the Company still employed 11 foreigners and five 5 local employees who held similar positions as the Employee.
To justify not following the LIFO principle. The employer must provide clear evidence to prove that the employee does not have special skills required for the job. The Court of Appeal stated that the Company had failed to show and provide evidence that it was justified not to follow LIFO, or that there were special skills in the foreign and contract employees in preference to the Employee.
An employer must retrench foreign workers before local employees unless there are reasons for not doing so. The Court of Appeal reiterated that “it is a principle of retrenchment as contained in the Code of Conduct that if the exercise is necessary then the company must retrench the staff starting with those who are foreign workers”. Based on the facts of the case, the Court of Appeal stated that there was no evidence that the foreign employees had the skills which the Employee did not have.

The Company argued that the Employee’s contention that the non-adherence with LIFO and retention of foreign employees representing non-compliance with the Code was not valid, as the Code does not have force of law. Therefore the compliance is not mandatory or fatal. The Court of Appeal agrees that the Code does not have force of law but:

“it is still the gold standard by which a company’s action may be measured against to see if the whole exercise of retrenchment had been carried out bona fide and that every attempt had been made to explore alternatives before the termination on account of retrenchment”.

Conclusion

Despite not having the force of law, the importance of compliance with the provisions of the Code in a retrenchment exercise has been demonstrated by the decision of the Court of Appeal in Ng Chang Seng v Technip Geoproduction (M) Sdn Bhd & Anor (2021). The principles laid down by the Court of Appeal shall be taken as a guideline by employers in a retrenchment exercise.

Employers are advised to conduct an assessment prior to undertaking a retrenchment exercise to ascertain there are no other viable alternatives available.